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A New Air India Gets Ready to Soar High

Analysis of Air India’s Growth Strategy and Outlook After Privatization

Source and Citation: Originally reported by CAMPBELL WILSON, ET Bureau, Jan 01, 2024

Layman’s Explanation

The article outlines Air India’s plans and growth ambitions following its privatization in 2021. After the privatization, Air India aims to capitalize on the booming aviation market in India, with expectations of tripling international passenger traffic by 2030. To meet this demand, Air India has placed orders for 470 new aircraft, scheduled for delivery by 2028-29.

The airline is undergoing a significant transformation, with a new plane arriving every six days until 2024. By March 2024, one-third of wide-body planes will feature new cabins, and the entire widebody fleet will be refurbished by the end of 2025 to enhance service standards. Initiatives are also in place to revamp the website, app, airport lounges, and loyalty programs, with a strong emphasis on improving customer service. The workforce is expanding, with over 9000 new hires, and the group now includes full-service Air India, low-cost Air India Express, and Vistara, which might merge pending approvals. The goal is to position Air India as a global standard airline, with accelerated changes expected in 2024.

A New Air India Gets Ready to Soar High

Impact on Retail Investors

For retail equity investors in India, Air India’s growing market share and expansive plans post-privatization present investment opportunities. The focus on service quality and premiumization is expected to lead to higher ticket prices, potentially increasing revenue. The possibility of Air India going public through an Initial Public Offering (IPO) in the coming years offers retail investors access to the public market.

The positive impact extends to the entire aviation ecosystem, benefiting airports, aircraft maintenance services, and hospitality and tourism sectors. Increased connectivity domestically and internationally creates demand in these sectors. Cargo throughput growth at airports also opens opportunities for logistics companies. Air India’s large aircraft order has stimulated local manufacturing for suppliers like Interglobe Aviation. Long-term trends indicate robust growth in domestic air penetration and outbound tourism, offering investment prospects across various segments.

Impact on Industries

The civil aviation industry directly benefits from Air India’s resurgence, leading to enhanced capacity, improved service standards, and reliability. Younger fleets contribute to cost efficiency gains, making the industry more competitive. Industry consolidation is expected to improve pricing discipline.

Associated sectors such as airport operators, aircraft maintenance providers, aviation fuel suppliers, in-flight caterers, and players in hospitality and tourism experience increased traffic volumes with rising airline capacity. A global travel rebound also brightens near-term business sentiment.

However, low-cost airlines with older aircraft and limited service flexibility may face challenges, potentially necessitating upgrades or consolidation. Elevated competitive intensity, especially in international routes, poses risks of pricing power erosion. Smaller niche airlines may fare better amid consolidation.

Long-Term Benefits & Negatives

In the long term, Air India’s ambitious turnaround contributes to India’s globally admired national carrier, improving connectivity and generating economic impacts from increased tourism. The upgrade in service and safety standards enhances national branding.

The renewed national airline signals progress in public sector reforms, reflecting pro-business policies, bureaucratic independence, and industry openness. This positively influences investor perceptions across infrastructure assets, fostering effective private participation.

However, smaller budget airlines lacking scale and capabilities may face reduced prospects, leading to consolidation. Some pricing pressure may persist due to competitive intensity, despite overall passenger volume growth. Execution risks, such as cultural integration after mergers, need careful monitoring by investors.

Short-Term Benefits & Negatives

In the short term, Air India’s fleet and route expansion plans positively impact business and consumer confidence. Improved domestic and global connectivity supports wider economic recovery during the post-pandemic rebound.

Existing players in the aviation, tourism, and hospitality sectors experience growth, benefiting their business performance and investment appeal in 2024. However, smaller or weaker airlines may face immediate pressures, necessitating strategic responses to protect or gain market share amid Air India’s renewed aggression.

Competitive intensity can affect overall industry profitability, but savvy players may use this as a catalyst for their own service and operational improvements. Retail investors can identify opportunities among airlines, airports, and related stocks poised for growth despite short-term competitive dynamics.

Potential Gainers and Losers from Air India’s Transformation

Indian Companies:

Gainers:

  • Air India Express (AIXI): As a subsidiary of Air India, AIXI stands to benefit from its parent’s expansion by potentially receiving older Air India planes for its fleet and leveraging the shared network and infrastructure. This could boost its market share and profitability.
  • SpiceJet (SPICE): Increased competition from Air India may force airlines like SpiceJet to become more efficient and improve their offerings, potentially attracting cost-conscious customers. Improved service could ultimately benefit market sentiment.
  • Indian Airport Operators: Increased passenger traffic due to Air India’s expansion will benefit airport operators like Adani Airports Holdings Ltd (AAHL) and GMR Airports Infrastructure Ltd (GMRINFR). This could lead to higher revenues from landing fees, retail concessions, and other passenger services.
  • Travel and Tourism Businesses: Increased domestic and international travel fueled by Air India’s growth will benefit travel agencies, hotels, and tourism operators across India. Increased demand could improve their occupancy rates and generate higher revenues.
  • Catering Companies: With a larger fleet and more routes, Air India will require food and beverage services. This could benefit catering companies like Taj SATS Services Ltd (TATAELX) and Lite Bite Foods Ltd (LBFL) with potential contracts and increased business.

Losers:

  • InterGlobe Aviation (INDIGO): As the current market leader in domestic aviation, IndiGo might face increased competition from a revitalized Air India. Air India’s aggressive expansion and improved offerings could attract some of IndiGo’s market share, impacting its passenger volumes and potential revenue.
  • Low-cost Carriers: The potential merger of Air India Express with AirAsia India could create a strong budget airline competitor, putting pressure on existing players like Go Airlines (GOCOAL) and SpiceJet. This could lead to price wars and lower yields for all players.

Global Companies:

Gainers:

  • Airbus (AIR): Air India’s order for 470 Airbus aircraft is a significant boost for the planemaker. This will increase production volumes, generate higher revenues, and potentially improve Airbus’ market share in the Indian aviation market.
  • Boeing (BA): While not receiving the majority of the order, Boeing still secured deals for 220 planes from Air India. This will contribute to their production and revenue, strengthening their presence in the Indian market.
  • Engine Manufacturers: Companies like Rolls-Royce (RR.), GE Aerospace (GE), and CFM International (CFM) will benefit from supplying engines for Air India’s new fleet. Increased demand for engines could improve their production volumes and revenues.
  • Aircraft Interiors and Systems Providers: Companies specializing in aircraft interiors like Collins Aerospace (COL) and Thales Group (TCFP) could see increased business as Air India refurbishes its existing fleet and equips its new planes.
  • Airline Technology Providers: Companies providing IT solutions and operational systems for airlines, like Sabre Corporation (SABR) and Amadeus IT Group SA (AMS), could potentially benefit from Air India’s plans to revamp its technology infrastructure.

Losers:

  • Smaller International Airlines: Increased competition on international routes from Air India’s expansion could impact smaller airlines struggling to fill planes. This could lead to lower yields and profitability for these airlines.
  • Regional Airlines: If Air India expands its domestic network to include smaller routes currently served by regional airlines, it could impact their market share and profitability.

Market Sentiment:

The news article is likely to be met with positive sentiment in the Indian market, particularly for companies directly involved in the aviation and travel sectors. The potential for increased economic activity and job creation through Air India’s expansion could have a positive ripple effect across the economy. However, some companies, like established airlines and regional carriers, may see their market share and profitability negatively impacted.

This analysis is based on the information provided in the article and current market conditions. It is important to note that the actual impact of Air India’s transformation on individual companies could be different and should be further researched based on specific financial situations and market dynamics.

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